The year ahead in tax collection: what to expect in 2014

Economy January 29, 2014 00:00

By Jonathan Blaine

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As we start the new year, there appear to be several issues facing the Thai Revenue Department, some of which may be achievable in 2014 and others that may have to take a back seat given the current political tensions running through the country.

Important issues remain uncertain, with potentially serious consequences for Thai taxpayers and foreign investors alike. Uncertainties regarding income-tax rates, negotiations with the United States on an intergovernmental agreement, and modernisation of the tax system to address tax-avoidance structuring all seem poised to make investment in Thailand a more difficult prospect. Meanwhile, in the background looms the formal launch of the Asean Economic Community slated for next year.

In the past few years the Thai government has worked to reduce the rates of corporate and personal income tax to a level that is competitive with its Asean neighbours. The corporate rate has been reduced from 30 per cent to 20 per cent over the past three years. Meanwhile, the personal-income-tax rates have been adjusted from five brackets to eight and the top rate has been reduced from 37 per cent to 35.

These positive developments in the tax-rate structure have been met with reserved enthusiasm from the investment community. The reservation derives from the manner in which these reforms have been enacted.

Both rate reductions have been temporarily implemented via the royal-decree process, and unless they are made permanent through parliamentary action, there is a chance they will reverse unless a government can be installed to extend the royal decrees before they expire.

In addition to the tax-rate uncertainty, there exists uncertainty around when and if the government will be able to finalise the much-anticipated intergovernmental agreement with the United States. An IGA is an agreement that domesticates the new US Foreign Account Tax Compliance Act (FATCA). Under such an agreement, the Thai Revenue Department would step into the shoes of the US Internal Revenue Service and would require that all financial institutions operating in Thailand report certain account-holder information to the Thai agency. It would then pass this information on to the US.

The completion of an IGA has been much anticipated by Thai financial institutions and is seen as a way of reducing compliance uncertainty and potential tax liability.

Even though negotiations between Thailand and the US are still ongoing, the ability to finalise an agreement and enact required legislation is hampered by the current unstable political environment.

Then there is the whole host of tax-reform measures needed to bring Thailand into line with some of its more competitive Asean neighbours such as Singapore and Malaysia. These include the formalisation of the current transfer-pricing guidelines, which govern the pricing of cross-border transactions. Without a more formalised transfer-pricing scheme, foreign investors could potentially find it increasingly more difficult to structure their cross-border investment and supply chains through Thailand.

Certain tax-avoidance legislation is also needed to bring the country into line with international tax standards and to prevent Thai companies as well as foreign investors from avoiding taxes through using various structures that reduce or eliminate taxes due here in Thailand.

These measures include rules that limit the use of debt in financing structures (known as thin capitalisation) and the setting up of companies in low-tax jurisdictions (known as controlled foreign corporation rules) for the purposes of reducing taxes.

These are typical anti-tax-avoidance rules that are seen as standard in many countries and are becoming the norm among Asean member states as they seek to bring their tax regimes into line with those of most developed countries. Putting these reforms in place would prove most beneficial if they were enacted before entering the AEC, as competitive forces are set to increase once the economic community springs to life in 2015.

All this uncertainty will not bode well for business, as most companies and investors shy away from uncertainty.

There is only a short time left until the AEC comes fully into force. Instead of focusing on all that needs be accomplished before this extremely significant transition, the Thai government is forced to deal with protests and political upheaval. These distractions could have a lasting impact on the Thai economy and on foreign investment.

Let’s hope there is a peaceful resolution to the current stand-off soon, otherwise the negative impact on the Thai economy could prove long-lasting and problematic to whoever holds the reins of power.